Forward Swap
Contents
Exploring Forward Swaps: A Guide to Deferred Agreements
Deciphering the Concept of Forward Swaps
A forward swap, alternatively known as a deferred or delayed-start swap, embodies an arrangement wherein two parties commit to exchanging cash flows or assets at a predetermined future date, with the exchange commencing at a later agreed-upon time. While interest rate swaps are the prevailing type associated with forward swaps, other financial instruments may also be involved.
Unveiling the Dynamics of Forward Swaps
At its core, a swap represents a derivative contract facilitating the exchange of cash flows or liabilities from distinct financial instruments. Within this framework, a forward swap defers the initiation of obligations outlined in a previously established swap agreement to a future date.
Navigating the Terrain of Forward Swap Applications
The versatility of forward swaps allows for the inclusion of multiple swaps within the agreement, enabling parties to orchestrate cash flow exchanges at various future intervals. In scenarios involving interest rate swaps, the commencement of interest payments is postponed to a predefined future date, deviating from the conventional one to two business days typical of swaps.
Examining Forward Swaps in Action: An Illustrative Scenario
Consider a scenario where Company A and Company B each hold loans of $100 million, one at a fixed interest rate and the other at a floating interest rate, respectively. Anticipating future shifts in interest rates, both companies seek to optimize their loan arrangements. Through a forward swap, they can hedge against potential fluctuations in interest rates while strategically timing the exchange of cash flows to align with their financial objectives.